$9,000 Price Cap Would Have Yielded More Than Three Times Annualized Fixed Costs of New Peaker in 2011, ERCOT Backcast Shows

Had a $9,000/MWh high system wide offer cap been in place in ERCOT during 2011, peaker net margin would have been approximately three times the annualized fixed costs of a new gas-fired peaking unit, when not considering the triggering of a reduction in the high cap from reaching peaker net margin, a backcast conducted by ERCOT shows.

The bonanza results show again that the energy-only market, when properly designed, sufficiently rewards generators with scarcity revenues, and that supplemental capacity payments are not needed to cover fixed costs.

Specifically, ERCOT's backcast showed that peaker net margin for 2011, using a $9,000 high cap, would have been $289,000. Note this level even exceeds Staff's proposed increased peaker net margin trigger of $262,500 as included in the long-term resource adequacy rulemaking.

Annualized fixed costs of a new gas-fired peaking unit were determined to be in the $80,000-$105,000/MW-year range in the IMM's 2011 State of the Market Report.

Aside from the $9,000 high cap, the $289,000 peaker net margin was reached under a scenario reflecting the revised that Power Balance Penalty Curve which took effect August 1, 2012, which features penalty costs ramped in over 200 MW. When penalty costs were ramped in over 50 MW, ERCOT's backcast resulted in peaker net margin of $359,000.

ERCOT's backcast also reflects the transfer of 500 MW from Non-Spin Reserve (Non-spin) to Responsive Reserve (RRS) and Offer Floor Caps on Non-spin, RRS, Regulation Up (Reg-Up), Reliability Unit Commitment (RUC) committed Resources, and Reliability Must-Run (RMR) Resources.

ERCOT's backcast did not consider the transition from High System-wide Offer Cap (HCAP) to Low System-wide Offer Cap (LCAP) which is triggered by the peaker net margin threshold.

For 2012 (through August), the $9,000/MWh high cap would have resulted in peaker net margin of $30,000, under a 200 MW Power Balance Penalty Curve ramping.

While no doubt capacity owners will cite the number as indicative of some sort of crisis, the result is consistent with an efficient market design that with resources in excess of the target 13.75% reserve margin (summer 2013 reserve margin at 14.3% per the May 2012 CDR). And despite this capacity surplus, a new peaker still would have, to date, recovered 40% of annualized fixed costs, with five additional months left to earn greater revenue.

ERCOT's backcast also showed that in the August 2011 scenario, doubling the high cap increased credit exposure by a factor of only 1.5.

Moreover, in the August 2012 scenario, the price caps had no impact on credit exposure.

Link to ERCOT Backcast